In investment, when time is abundant, time is your partner; when time is scarce, time is your enemy

The situation and handling of real institutions in the crash.

Recently, the emergence of negative factors such as repeated overseas epidemics and tightening of liquidity has caused some shocks in A-shares. For investors, they are also undergoing emotional tests. Charles Schwab, the founder of American asset management giant Charles Schwab, has a lot of experience in crashes and risks. He summarized the investment history of the past 50 years and believes that “from a broader time frame, the overall market trend is constantly upward. Persevere, you are a qualified investor.”

Charles Schwab in his book: shared their 1987 “Black Monday”, “investment continued innovation Schwab Road” in the case of when the difficult dilemma. At that time, Charles Schwab had just gone public. Not only did their stocks plummet, but their company’s stock price also plummeted. From the rearview mirror, many employees who participated in the IPO did not return to their capital until two years later. To make matters worse, a Hong Kong customer of Charles Schwab liquidated its position. In the tug-of-war for the security deposit, Charles Schwab was also forced to hold a media briefing to explain the harm to the company. All the problems were concentrated in just ten days. After finally going through this storm, Schwab said with emotion, “Anyway, even if you want to jump down the abyss, it does not mean you can close your eyes and do nothing. You can’t use your entire net worth to gamble, you have to evaluate The risks you can take. When you think things through, your experience, maturity, intuition, and the many tests you have gone through will increase your probability of winning.”

“Red Weekly” has compiled this chapter of the book to show investors the situation and handling methods of a real institution in a slump.

financial crisis

No one can predict the arrival of the crisis until it is truly aware of its existence. This does not mean that there is no early warning signal. The inherent risk of the market is inherent, and it sends out early warning signals every day. But only in hindsight will people associate these warning signs with the crisis. I don’t have a crystal ball that can predict the crisis. Although there are many signs, I didn’t expect the crisis to come so quickly, and it will be violent.

The week of October 12, 1987 was very painful. The Dow Jones Industrial Average plummeted 3.8% on Wednesday. Then, the U.S. Department of Commerce’s report on the trade deficit and the relevant U.S. House of Representatives committee will legislate to terminate the tax incentives for financing mergers and acquisitions. Policy rumors led the Dow to continue to fall 2.4% on Thursday. On Friday, October 16, 1987, the Dow Jones Industrial Average plummeted by 108 points, or nearly 5%. The total trading volume on the New York Stock Exchange was 343 million shares, twice the normal volume. On this day, the single-day drop of the Dow Jones Industrial Index exceeded 100 points for the first time. The market seems unable to handle such a large number of programmatic transactions.

At Charles Schwab, the trading volume that had maintained a high level was still increasing every day that week. By the close of Friday, we had broken the highest record. That week, we had an average of 19,000 transactions per day, which was nearly 60% higher than the average of previous years. Many transactions mean more income and business is thriving, but my emotions are very complicated. In my opinion, a large number of investors stop at the door of the branch to look at the stock market. They usually choose to sell their stocks after seeing what is happening. This shows that customers are feeling uneasy.

That week, the atmosphere in our office was also very tense. Colleagues had to work overtime every day to deal with extra paperwork. The statistical work of many companies across the United States is more complicated because they participate in so-called principal transactions, that is, trading with their own funds and accounts, or gaining risk exposure through stock underwriting in their investment banking divisions. The commissioners of the New York Stock Exchange and the market makers of the over-the-counter market are the worst. Their responsibility is to ensure the orderly operation of the stock market (matching buyers and sellers), which usually means that when investors sell stocks urgently and cannot find buyers, they can only use their own funds to buy these stocks . Not only did investors experience the pain of falling stock prices, those in the industry who were forced to buy stocks from panicked sellers also experienced the pain, because as the successors, they could only watch the value of their stocks evaporate.

Our trading volume for the second week will be very great, this is the board nails thing. We cancelled holidays and recruited temporary staff. We employ approximately 2,500 people, most of whom have licenses to engage in brokerage business. Regardless of their current responsibilities, if necessary, they can immediately execute orders. One of the important risks that every brokerage company will pay close attention to is the margin balance. The margin call for a single stock is aimed at a single customer. However, when the continuously falling stock price causes the scope of the margin call to expand, it will trigger more sell-offs and induce a clearing out of the entire market.

This is one of the biggest threats we have seen facing the entire industry. Tom Sepp, who was in charge of our international branch at the time, was very worried after communicating with the team. He went to the office that weekend to learn about the latest situation of all international branches and make sure that we are fully prepared for the upcoming week. Others are checking the database, looking for accounts that might pose a risk. On that Sunday, Tom heard about the client Wang Dehui for the first time. Wang Dehui, a billionaire in Hong Kong, China, received a margin call and was required to add millions of dollars on Monday morning. Tom was shocked that this margin call was the largest amount he had seen so far. He immediately called Hong Kong, China, and called Larry Yu, the local branch manager, from his bed. He wanted to find this customer.

Yu explained that Wang Dehui is a very wealthy customer in Hong Kong, China, and his account was hit hard last Friday. Before the market opened last Friday, his account had a market value of US$50 million, but when the market closed that day, there was a loss of US$8 million to US$12 million. Wang has been using options strategies to earn a little extra income. This is a very common strategy under normal market conditions, but the market at that time was already quite unfavorable for him. Yu said that he had called Wang on Friday and told him to replenish funds immediately to meet the margin call requirements, otherwise we will have to liquidate his assets to make up the difference. Wang is eager to save his existing investment, and he firmly believes that the market will rebound. If you sell now, the book loss will become an actual loss. Wang is one of the richest people in Hong Kong, China. He and his wife own many high-rise buildings in Hong Kong, China, which makes him one of the largest real estate holders in Hong Kong, China. He has a lot of assets to protect his position, and we are very confident about it. He has collateral, but under the current market conditions, he needs working capital. Last Saturday morning, he met in person and brought bank statements for two huge accounts to prove that he can repay the debts he owes without selling the shares held in Charles Schwab’s account. He is committed to ensuring that these assets are under his control. We believe that as long as he signs, the bank can provide him with funds. As it was a weekend, Wang left a copy of the statement to Yu and promised to honor the pledge of margin call immediately after the bank opened on Monday morning. No one knows what will happen on Monday. Yu agreed to continue to wait. Tom Sepp asked Yu to keep in touch with Wang Dehui.

With the opening of major exchanges around the world, reports began to be heard one after another, and the wave of stock selling came from Tokyo, Hong Kong, Frankfurt, and London. As investors dumped stocks one after another, the price of each stock fell precipitously. No matter what happens after the New York Stock Exchange opens, it will be a huge shock for us.

October 19, 1987, San Francisco, at dawn. I remember the air was very cool and the light was very clear. It was a complete beauty of autumn, after the summer fog dissipated, went to San Francisco the best season. However, that morning, everyone in the office had an ominous premonition.

I and my management team in the office next door to the small Council meeting room will be opened. Communication, publicity, advertising, computer systems, employee morale, overtime arrangements, food, operations, etc., there are too many things to discuss. David Portruk got married last weekend, but he cancelled his honeymoon plan. Everyone is in position. I have gone to our branch on the first floor to meet with you, just to make it clear to the employees working there that I did not panic. After returning to the upper floor, we used the simplest way to discuss with the team: “find a solution to this problem.” 15 minutes before the New York Stock Exchange opened, a report was sent saying that 500 million US dollars of selling orders had been accumulated at that time. . The telephone line has been broken.

At 9:30 am Eastern Time, the stock market opened, and a wave of selling from all over the world hit New York. The benchmark stock index of the New York Stock Exchange fell 10% at the opening. A few hours after the market opened, many well-known companies also started trading when the trading specialists were trying to figure out the chaotic order situation or looking for buyers willing to sell for the sellers.

I have put too much effort into persuading people to believe that investment can bring wealth, and I know that this crash is temporary. I cannot imagine the possibility that millions of people might give up their investment.

Many of the people who suffered that time were customers and employees who were actively participating in Charles Schwab’s IPO a few weeks ago. This deepens my worries. A few weeks ago, Charles Schwab’s stock issue price was $16.50 per share, but on the day of “Black Monday”, the stock price fell to $12.25 per share and plummeted to $6 per share at the close. I have tried my best to ensure that those who work for me, especially those who have survived the control period of Bank of America, can get Charles Schwab shares in return for this public offering. However, each of them has been hit hard, and so have myself. Our stock price didn’t start to rebound until 2 years later, and it took another 2 years to really climb, but for those who sold their stocks before the stock price rebounded, everything was too late. I don’t think that human nature can well balance the patience and strong desire required for investment. We are destined to fight or flee. On the chart of the S&P 500 index over the past 40 years, you will see continuous ups and downs. These ups and downs represent moments of panic or triumph. But looking at a broader time frame, you will find that its overall trend is constantly upward. Persevere, stand the test of your emotions, and you are a qualified investor.

Regarding investment, there is a core truth: when your time is abundant, time is your best partner; but when your time is scarce, time will become your worst enemy.

In addition to two days every brokerage firm in the world stock markets suffered heavy hit to ask questions, we also face unique challenges, mainly because we just listed. Our initial public offering occurred within the past 90 days, and we are still in the prospectus delivery period. In the meantime, the company and the underwriters will keep a close eye on what occurred in the Company, both on the signed prospectus, if our situation did not get proper disclosure, then both of us will be held accountable. If the company has a catastrophic event after the issuance period, then this is a problem for the company’s management, but if a serious situation occurs during the issuance period, then it will be a big problem for many parties, including the company, management, underwriters, lawyers, Accountants etc. The lawyer made it very clear that we have no choice but to disclose any substantial changes or signs of changes in the company during those bleak days, even if we do not know what the real impact of these changes will be. We live under the microscope.

This reminds me of Wang Dehui. We need to quickly control the risks he may bring, because the losses we face will be made public in the near future. In fact, Wang is not only a high-quality customer of Charles Schwab, but also a high-quality customer of other brokerage companies. But his short put option trade caused himself trouble.

Thursday, October 29, 1987. We arranged a press conference that afternoon at the St. Francis Hotel. As we promised, we will explain all the disclosures at the meeting. That morning, we will issue a press release stating the disclosure information before the stock market opens. Negotiations in Hong Kong are still ongoing.

On the day before the deadline, we were still far away from Wang Dehui’s bid. Wang offered US$40 million and said whether we wanted it or not, but we insisted on asking US$80 million and gave this the final offer, otherwise we Similar hints that will go to court.

In the end, the two parties reached a consensus and the negotiating team called back from Hong Kong and told us the news. The agreement established an aggressive repayment plan. We have not recovered all the money that the king owed us. If there is more time, we may get more back, but we are not interested in squeezing the last cent out of the settlement agreement. We believe that it is better to just take what you can, and then close the document and leave, rather than choose to negotiate endlessly.

We recovered most of the losses, totaling US$67 million, of which US$12 million was immediately recoverable, and US$13 million was recoverable after two weeks. The remaining payment will be recovered in installments over the next 5 years. . At this point, we can announce that our pre-tax loss related to the stock market crash (including accounts unrelated to Wang Dehui) is $42 million, which is within our tolerance. We can still achieve profitability (annual net profit exceeded 24 million U.S. dollars, an increase of 66% over 1986).

That afternoon, exhausted, we took the second press release to the Saint Francis Hotel. The room was full of people. I feel like a witness who was hostile in a congressional hearing. In the previous 10 days, we were exhausted from lack of sleep and endless anxiety, but this did not arouse the slightest sympathy from everyone. The first question comes from a reporter who wants to know what naked short put options are. Larry stepped forward and tried to explain that he was usually very good at doing this kind of things, but obviously not that day. He stammered for a while without explaining clearly, and finally gave up. That was the only time I heard laughter that day. After that, I dealt with the remaining issues. I try to remain calm, sensible and accurate, and never underestimate the problems before me. My message is simple: we have encountered a big problem that requires a great price. This is an unexpected risk, and we are not the only company that has been hit. We used industry standard risk management methods, but we found that it was not enough. Next, we have to solve the problem and move on. I not only speak out to the media, but also to customers, and of course I have to instill this fact in Charles Schwab’s staff. I know that their hard work has just begun. I have always felt that when you make a mistake, if you stand up and admit your mistake, people will believe that you are innocent.

Can a crisis produce value? “Black Monday” allowed us to conduct a long-term rigorous review of our margin loan business. Does the customer’s risk tolerance match the product’s risk characteristics? Before granting credit to customers, do we know them well enough? Are our collateral requirements high enough? Essentially, the question we consider is, can Wang Dehui’s situation be avoided? The answer is no, this answer caught everyone off guard. Historically, the securities brokerage industry has always regarded the margin requirements set by regulatory agencies as the minimum standard for credit risk. Unfortunately, this set of guidelines failed in the market crash of 1987. So frankly, yes, we are very vulnerable when facing this particular risk, and we need to make more efforts to manage it in the future.

In any case, even if you want to jump out of the abyss, it does not mean you can close your eyes and do nothing, at least I wouldn’t. You can’t use your entire net worth to gamble, you have to assess the risks you can take. When you think things through, your experience, maturity, intuition, and the many tests you have gone through will increase your probability of winning. To me that 1987 is one such test.

Of course, we will be tested again, many times. I believe it will be the same in the future. But after 1987, we became more independent and wiser, and we became a better company.

In investment, when time is abundant, time is your partner; when time is scarce, time is your enemy

Title: “Investment: Charles Schwab’s Continuous Innovation in Financial Management” Author: Charles Schwab (Charles Schwab) Press: CITIC Publishing Group

About the Author:

Charles Schwab

The founder, former CEO and current director of Charles Schwab, a world-renowned financial investment guru. Charles Schwab is a financial services company headquartered in San Francisco. Founded in the 1970s, it has become a leader in the US personal financial services market and is known as “the greatest contemporary Internet brokerage . ” In 2020, Charles Schwab will be ranked 3rd in the global TOP10 fund company list with its asset management scale of US$4.28 trillion, second only to BlackRock Group and Pioneer Linghang Group. Since its establishment, Charles Schwab has continued to develop new businesses and new business models. It can be called a model of innovation in the financial industry. More importantly, its innovation process has not affected the company’s operational efficiency. Charles Schwab was awarded the Financial Service Innovation Lifetime Achievement Award by the US financial industry for his outstanding contributions to the financial services industry in the past half century. “Forbes” magazine calls Schwab the “King of Online Brokerage”

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